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Is Tax Policy Coordination Necessary?

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  • Kollintzas, Tryphon
  • Philippopoulos, Apostolis
  • Vassilatos, Vanghelis

Abstract

The answer to this question is "yes". We re-examine noncooperative and cooperative equilibria under perfect capital mobility. To this end, we develop a two-country optimal growth model with endogenous national fiscal policies. The channel for interdependence is distortionary income taxes. We study both the Residence and Source principle of international taxation. National governments play Stackelberg vis-à-vis private agents, while they can play either Nash or cooperate vis-à-vis each other. We solve for Markov-perfect (time consistent) equilibria. We show that the pertinent Nash equilibria are degenerate. Thus, under both the Residence and Source principle, only cooperative equilibria can exist. The driving force is perfect capital mobility. This is a new result that provides a strong argument for world tax coordination. When we solve for cooperative equilibria, we show that it is optimal to set a common tax rate across countries, irrespective of the principle of international taxation (Residence or Source) and differences across countries. A cooperative solution under the Source principle may be more difficult to implement than under the Residence principle.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2348.

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Date of creation: Jan 2000
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Handle: RePEc:cpr:ceprdp:2348

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Keywords: Markov-Perfect Equilibrium; Optimal Taxation; Residence And Source Principle; Tax Coordination;

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References

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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  2. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
  3. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  4. Kollintzas, T. Philippopoulos, A. & Vasillatos, V., 1999. "Normative Aspects of Fiscal Policy in an Economic Union: a Theoretical Review," Athens University of Economics and Business 109, Athens University of Economics and Business, Department of International and European Economic Studies.
  5. V.V. Chari & Patrick J. Kehoe, 1989. "International coordination of fiscal policy in limiting economies," Staff Report 121, Federal Reserve Bank of Minneapolis.
  6. Kollintzas, T. Philippopoulos, A. & Vasillatos, V., 1999. "Normative Aspects of Fiscal Policy in an Economic Union: a Theoretical Review," DEOS Working Papers 109, Athens University of Economics and Business.
  7. Assaf Razin & Chi-Wa Yuen, 1999. "Optimal International Taxation and Growth Rate Convergence: Tax Competition vs. Coordination," International Tax and Public Finance, Springer, vol. 6(1), pages 61-78, February.
  8. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
  9. Kollintzas, Tryphon & Philippopoulos, Apostolis & Vassilatos, Vanghelis, 1999. "Normative Aspects of Fiscal Policy in an Economic Union: a Review," CEPR Discussion Papers 2212, C.E.P.R. Discussion Papers.
  10. Jacob Frenkel & Assaf Razin & Efraim Sadka, 1991. "International Taxation in an Integrated World," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061430, December.
  11. Kehoe, Patrick J., 1987. "Coordination of fiscal policies in a world economy," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 349-376, May.
  12. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  13. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  14. Persson, Torsten & Tabellini, Guido, 1996. "Federal Fiscal Constitutions: Risk Sharing and Moral Hazard," Econometrica, Econometric Society, vol. 64(3), pages 623-46, May.
  15. Torsten Persson & Guido Tabellini, 1990. "The Politics of 1992: Fiscal Policy and European Integration," NBER Working Papers 3460, National Bureau of Economic Research, Inc.
  16. Obstfeld, Maurice, 1990. "A Model of Currency Depreciation and the Debt-Inflation Spiral," CEPR Discussion Papers 431, C.E.P.R. Discussion Papers.
  17. Kehoe, Patrick J, 1989. "Policy Cooperation among Benevolent Governments May Be Undesirable," Review of Economic Studies, Wiley Blackwell, vol. 56(2), pages 289-96, April.
  18. Razin, Assaf & Sadka, Efraim, 1991. "International tax competition and gains from tax harmonization," Economics Letters, Elsevier, vol. 37(1), pages 69-76, September.
  19. Stokey, Nancy L., 1991. "Credible public policy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 627-656, October.
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Citations

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Cited by:
  1. Jim Malley & Apostolis Philippopoulos, 2000. "Economic Growth and Endogenous Fiscal Policy: In Search of a Data Consistent General Equilibrium Model," CESifo Working Paper Series 235, CESifo Group Munich.
  2. Frode Brevik & Manfred Gärtner, 2006. "Macroeconomic effects of banking secrecy when tax evasion is endogenous," University of St. Gallen Department of Economics working paper series 2006 2006-10, Department of Economics, University of St. Gallen.
  3. Jim Malley & Apostolis Philippopoulos, 1999. "A note on testing for tax-smoothing in general equilibrium," Working Papers 1999_17, Business School - Economics, University of Glasgow.
  4. Jim Malley & Apostolis Philippopoulos & George Economides, 1999. "Testing For Tax Smoothing In A General Equilibrium Model Of Growth," Working Papers 1999_22, Business School - Economics, University of Glasgow.
  5. Manfred Gärtner & Frode Brevik, 2006. "Can tax evasion tame Leviathan governments?," University of St. Gallen Department of Economics working paper series 2006 2006-19, Department of Economics, University of St. Gallen.
  6. Frode Brevik & Manfred Gärtner, 2005. "Welfare and Distribution Effects of Bank Secrecy Laws," University of St. Gallen Department of Economics working paper series 2005 2005-07, Department of Economics, University of St. Gallen.

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